EDITORIAL: Devaluation a double-edged sword

The New Taiwan dollar took a nosedive on Monday as it fell 0.65 percent versus the US dollar, matching the South Korean won’s unexpected devaluation of 0.94 percent to reach a five-year low against the greenback after South Korean President Park Geun-hye said a weak yen affected the country’s economy.

The significant devaluation in the NT dollar and won on Monday triggered fresh speculation about the recurrence of competitive devaluation in the Asia-Pacific region.

South Korea is one of Taiwan’s main export competitors, primarily in the electronics sector, which includes smartphones and microchips.

The NT dollar ended at NT$30.235 on Monday, regaining some momentum after hitting an eight-month low of NT$30.301 in the middle of trading.

The local currency devalued 0.94 percent versus its US counterpart in three trading days of this year, the same pace as the won’s 0.94 percent decline.

The yen dropped 0.57 percent, central bank data showed.

Yesterday, the NT dollar slipped another 0.26 percent, ending at NT$30.315 versus the US dollar.

Early last year, the yen’s decline fueled concern about competitive devaluation after the Japanese currency plunged below the key level of ￥90 against the US dollar, its weakest level since June 2010.

Fortunately, there was no currency war last year, as the yen’s dramatic depreciation did not spread across the region.

The Japanese currency regained some strength in the middle of last year and rebounded to above ￥100 against the US dollar.

Some economists attributed the inflow of overseas capital, primarily from the US, to the US Federal Reserve’s quantitative easing monetary policy.

The inflow of US dollars helped support the Asia-Pacific region’s currencies, alleviating pressure on central banks to weaken their currencies.

Some have said the rise in the Chinese yuan versus US dollar has helped stamp out competitive depreciation.

The renminbi has gained nearly 3 percent against the greenback for the whole of last year.

Will the currency war make a comeback this year?

The chances appear to be slim, as the US economy is widely expected to gain momentum this year, which could lead to central banks gradually tightening their monetary policies, following in the US Fed’s steps. As long as the money supply keeps dwindling, the value of currencies will rise in the long run.

The yen seems to be stabilizing after a 10 percent rise last year as Japan’s inflation has climbed to 1.2 percent last month, the highest in five years.

As long as the yen remains stable, the won and the NT dollar will hold steady.

Recent weaknesses in Asian currencies were mostly driven by the Fed’s stimulus tapering, as more US capital will be withdrawn from the Asian financial markets and return to the US markets.

Since Asian currencies are bound to devalue to some extent this year, Taiwan’s central bank simply followed the downtrend and exerted some influence on the NT dollar on Monday to help local exporters remain competitive in prices by matching the South Korean won’s decline.

However, that should not become the norm, as a weak NT dollar is a double-edged sword: It will hurt local consumers’ purchasing power and further weaken the economy’s private consumption.

Central bank governor Perng Fai-nan (彭淮南) has repeatedly said that the NT dollar’s depreciation should not come at the expense of public benefit.Considering this remark, the likelihood of a currency war is very slim.